What on earth is the economic rationale for capital gains being allowed to be "stepped-up" upon death but taxed otherwise. Even if you oppose capital taxation wouldn't a budget neutral "kill step-up + xpercent capital gains cut" be more efficient in every way? Obviously you could have a system of crediting liabilities against estate tax for large estates etc
Economic rationale for "step-up" of capital gains tax liability
byu/Jlyman1998 intax
Posted by Jlyman1998
11 Comments
Accumulation of wealth?
In theory the step up is taxed under the estate tax, so you’re paying 40% tax on that basis. Note the estate exclusion was raised to $15m as part of TCJA.
Several reasons. It’s significantly less administrative burden to manage estate taxes than trying to figure out carried over bases, it promotes building familial wealth, it’s “more fair” than taxing the unrealized gains of the deceased/taxing gains that happened before they owned the property
Someone died for that tax break and you want to take it away?
Its kinda to avoid double taxation. Estate tax filings taxes the transfer of assets and if you were to theoretically or actually sell after transfer, you would pay tax on the same appreciation. In the real world, most people are able to exclude the entire estate. My guess is it allows not as wealthy people who are under the exclusion to accumulate wealth by saving them some on taxes, and it avoids double taxation for the wealthier folks who actually paid an estate tax.
To be clear I am not talking about **realization at death**, I just mean the capital gain should carryover to the heir and paid when they choose to liquidate.
The entire asset value, including the cost basis is taxed at up to 40% by the estate tax when you die.
Now you want to tax the capital gain portion again at up to 23.8%?
You can argue what the lifetime estate tax exemption should be but the step makes absolute sense in order to avoid double taxation.
Your annual INCOME is taxed by the annual INCOME tax. Your WEALTH is taxed when you die by the estate tax.
Tell me the basis of your grandmother’s house that she bought in 1945 that has been through three rounds of renovations and improvements in 1963, 1983, and 2003, has had five roof changes, and there are no surviving records for any of this. She just died at the age of 103 and recalls little.
It used to be harder to get accurate records of cost basis for assets that had been held for most of a lifetime. It’s antiquated and needs to go.
Others have given you my two main arguments. It’s a convenience tool for those who inherit property to not have to replicate a decedent’s basis history when the decedent can no longer speak for him/herself; and it’s also a prophylactic tool to help justify why we are comfortable assessing estate tax on fair market value and give no estate tax deduction for untaxed unrealized gains. If we’re going to assess an estate tax on it before you’ve realized it, well then we’ll treat it like you’ve realized it once we’re done.
The reality though is that the step-up in basis is a tool that benefits primarily those who do not pay estate tax. Those who do pay estate tax, especially those whose estates are substantially over the threshold, trade a 23.8% (20% + 3.8% NIIT) stepped up income tax benefit for a 40% estate tax cost for each dollar of gain over the estate tax exemption. I always laugh when I hear folks like Bernie Sanders trying to argue that the majority of the benefit of the step-up goes to the rich, missing the point entirely that the billionaires in society happily give up the step-up as easily as drinking water.
Paying estate taxes so why cap gains.